Decoupling and the WTO: Farm sector and household impacts in the United States

The incorporation of domestic support policies under World Trade Organization (WTO) discipline introduced a new constraint into the decision framework for United States (U.S.) agricultural policy. The developing world focus of current WTO assessments leaves unanswered questions determining the palatability of agricultural reforms in subsidizing countries. This dissertation examines the distributional impacts of policy reform on the heterogeneous farm population in the U.S. Macro-micro analysis is conducted to predict agricultural impacts in the U.S. The macro model determines the changes in commodity and factor markets while the micro model determines differential welfare impacts across farm households. Partial reform of U.S. farm programs is found to contribute significantly to welfare improvement in most countries including the U.S., at small cost to aggregate U.S. farm income. Extending this to the micro level reveals more significant impacts with welfare declines disproportionately borne by households most reliant on farm sources of income. Farm versus non-farm sourcing of income is the primary determinant of welfare change, with a secondary role played by the relative importance of factor endowments (land, labor, and capital). The importance of factor shares and employment support the hypothesis that policies linked to either production or the farm asset base will have minimal impacts on reducing income inequality in the farm population. Farm household heterogeneity is investigated with respect to its behavioral determinants by fitting a micro-econometric model to farm household survey data. Time allocation decisions are found to be non-separable from farm production due to limited inter-sectoral mobility of farm labor. Non-separation implies that marginal hours are valued at the return from farm work and vary widely for a sample of Midwestern U.S. farmers. Thus, time allocation represents a significant source of heterogeneity in the farm population. An important implication of the non-separability of household and farm firm decisions is the presence of income effects on farm output when decoupled payments are increased. This effect is identified to be positive econometrically in the sample of farm households. The dissertation concludes that accounting for non-separability as well as more general sources of household heterogeneity is critical for agricultural policy analysis